Rev. Date July 11, 2024
What is Sensitivity Analysis?
Sensitivity Analysis was designed to help subscribers estimate how portfolios and investments could react to certain market shocks.Sensitivity Analysis allows users to shock market indices to stress test portfolios and investments across various types of market movements, such as:
Equity market performance. For example, estimate what could happen to a portfolio or investment if certain equity indices decline by a specified amount.
Emerging currency changes. For example, estimate what could happen to a portfolio or investment if emerging currencies lose a specific amount.
What indices can I use, and how do I add a new market shock?
In Analysis, users can select from a list of inputs to shock. A new shock can be added by clicking “Add market index” in the Sensitivity Analysis block. In Studio or Report Lab, users can add a new market shock by either selecting an index or ETF from the “Add Shock input” dropdown menu. Once a shock input is selected, users can enter in the size of the market shock for the analysis.
Shocks can be removed by clicking the trash can icon next to the name of the market index or ETF.
In order to change an existing shock, simply change the value in the shock value, and the Estimated Return of the portfolio or investment will update.
What is the time horizon for the shocks?
Sensitivity Analysis assumes the shock will occur over the next 30 days.
What is the shock range available for SensitivityAnalysis?
Shocks are limited to 150% of the most extreme historical positive and negative returns observed for that index.
What is the Estimated Return?
The Estimated Return is the estimated return of the portfolio or investment over the next 30 days, under the specified shock. This number is an estimate only and carries many uncertainties such as noise in estimating the portfolio’s or investment’s factor exposures. The error bands attempt to quantify this uncertainty.
Users can also hover over the estimated returns to see the factor contributions to estimated performance.
Generally, how is the Estimated Return calculated?
Venn calculates the sensitivity of the shock input as well as the portfolio’s or investment’s returns to the factors in the Two Sigma Factor Lens. By translating each return into the shared language of factor exposures, Venn can then estimate how a shock to one (here, the shock input) would affect the other (the portfolio or investment).
Further, Venn uses two different methodologies depending on the size of the shock:
For shocks less than 2 standard deviations, a linear approach, which does not model changing market conditions, is used.
For shocks greater than 3 standard deviations, a regime-based methodology is used.
For shocks between 2 and 3 standard deviations, the two methodologies are blended.
What returns are used to determine the portfolio’s or investment’s factor exposures?
The portfolio’s or investment’s factor exposures are calculated using at least the last 6 months of daily data or 1 year of monthly data for the portfolio or investment.[1]
How does Venn handle the portfolio’s or investment’s residual return?
Sensitivity Analysis explicitly measures the market shock’s impact on the portfolio’s or investment’s residual return. Venn breaks down the shock input into implied factors and its residual. The portfolio’s returns are regressed with respect to both the factors and the shock input’s residual to obtain the exposures to them. The total portfolio’s or investment’s residual contribution to estimated return consists of the return contribution from the shock input’s residual and the portfolio’s or investment’s regression residual.
If I add multiple shocks, does Venn calculate their impact on the investment’s or portfolio’s return in aggregate?
Currently, each shock is calculated independently of each other. For example, if your Sensitivity Analysis includes an equity market shock and a commodity, each row will represent the estimated effects of each shock on the portfolio or investment, not as if both were to occur at the same time.
Does the shock change what factors are being used to model the impact?
For each independent shock, Venn is modeling the impact of the shock input movement across all factors in the Two Sigma Factor Lens, regardless of which shock input is being used on which investment or portfolio. For example, shocking a commodity-related input could impact Equity, Interest Rates, etc., not just the Commodities factor. Users can hover over the estimated returns to see which factors are driving estimated performance.
[1] The minimum amount of data required depends on data frequency and type of analysis. For Sensitivity Analysis, if a user’s portfolio or investment has daily data, Venn will require at least 6 months, or if monthly it will require at least 1 year. For both daily and monthly data, Venn will prefer to use up to 3 years. Portfolios or investments with quarterly data must be interpolated to perform Sensitivity Analysis.
This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.